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All Contents © 2020The Kiplinger Washington Editors
By Lisa Springer, Contributing Writer
| April 21, 2020
Steep market declines in 2020 have not only been brutal on returns; they've also presented income investors with a conundrum. The market is suddenly flooded with a glut of high-yield dividend stocks, but dividends in general are less safe than they've been in more than a decade.
The S&P 500 has quickly risen from a yield of 1.8% at the end of December to a yield of about 2.1% today. That's still not an exciting number, of course. But both inside and outside the index, a number of stocks have seen their yields double, triple or more. That has made it easier than it has been in a long time to find high-yield dividend stocks offering up sizable income of greater than 5%.
At the same time, however, the market has been flooded with a run of dividend cuts. Some companies are watching their profits plunge as people are confined to their homes, creating short-term cash crunches that are forcing them to conserve as much capital as possible simply to survive.
The trick, then, lies in identifying great-yielding names that will be able to maintain their dividends even if this shutdown triggers a prolonged recession.
Here are eight of the safest high-yield dividend stocks right now. These stocks boast several traits that speak to dividend safety, from conservative balance sheets and durable cash flows to histories of maintaining dividends through previous economic downturns.
Data is as of April 20. Dividend yields are calculated by annualizing the most recent payout and dividing by the share price.
Market value: $124.0 billion
Dividend yield: 5.6%
Pharmaceutical powerhouse AbbVie (ABBV, $83.99) develops treatments for autoimmune disorders, cancers, viruses and neurological conditions. The company derives roughly 60% of sales from its blockbuster drug Humira, a treatment for rheumatoid arthritis, plaque psoriasis and other conditions. Other important AbbVie drugs include Imbruvica and Venclexta (for cancer) and new therapeutics Skyrizi (arthritis) and Rinvoq (psoriasis).
Humira sales are slowing, so AbbVie plans to re-energize its business by merging with Allergan (AGN). The combined business is expected to generate more than $30 billion in annual sales. Allergan adds blockbuster drugs Botox (wrinkles and migraines) and Restasis (dry-eye treatment) to AbbVie's portfolio.
The Allergan deal is expected to close in May, leaving AbbVie with $95 billion of post-acquisition debt. However, ABBV expects to leverage $19 billion of annualized cash flow from the combined business to trim $15 billion to $18 billion of debt by year-end 2021. AbbVie also expects to benefit from $3 billion of pre-tax cost synergies.
AbbVie is a Dividend Aristocrat on the merits of its 48-year streak of uninterrupted dividend growth, much of which is attributed to its time joined with Abbott Laboratories (ABT). As a standalone entity, AbbVie has generated seven years of dividend hikes – including a 35% boost announced in February – and an 18% annual dividend growth rate over the past half-decade
ABBV has long been among the market's safest high-yield dividend stocks. Indeed, the stock has only declined about 10% since the bull market's peak on Feb. 19, so its yield hasn't gotten much of a boost from share-price declines. Meanwhile, its payout look safe given that it represents just less than half of AbbVie's profits, and given that Aristocrats often go to greater-than-usual lengths to keep up their payouts in hard times.
Market value: $5.5 billion
Dividend yield: 5.1%
Bunge (BG, $40.09) is a leading global agricultural company with operations in commodity grain products such as corn and wheat; cooking oil and fats that it packages for food manufacturers; milled flour and cornmeal; sugar; ethanol; and various fertilizers. Bunge deals in products necessary for food production, which will naturally be impacted by a business downturn, but it won't erode completely. Bunge also recently improved its competitive positioning by trimming more than $250 million of annual expenses.
A 28% decline since Feb. 19 has launched Bunge among safe high-yield dividend stocks with a payout above 5%. But its quarterly dole appears safe for now. Adjusted operating cash flow of $1.06 billion last year provided triple the coverage of Bunge's $317 million annual dividend. That's no one-time thing: Cash flow has exceeded $1 billion in four of the past five years. And the company, which has increased its dividend for 18 consecutive years, announced in early March a 50-cent-per-share quarterly payout in line with its most recent dividend.
At the end of March, Baird analyst Ben Kallo added BG to his "Fresh Picks" list of stocks well-positioned to weather economic uncertainty. He likes Bunge's healthy balance sheet and robust cash flows and thinks the company will benefit from China restarting agricultural purchases this year.
Insiders also appear bullish on Bunge's prospects; CEO Greg Heckman purchased of a whopping $4.8 million worth of BG stock during March.
Market value: $156.0 billion
Dividend yield: 6.2%
In response to crude oil prices nearing 20-year lows, integrated energy giant Chevron (CVX, $87.17) has already taken aggressive action to protect its dividend, which the company calls its No. 1 priority. Chevron is cutting 2020 exploratory spending by roughly 30% and suspending share repurchases.
Chevron is the second largest U.S. integrated energy company – behind Exxon Mobil (XOM) – and has production and refinery operations worldwide. The company has a major drilling presence in the Permian Basin and Gulf of Mexico. It also operates refineries representing throughput capacity of 1.7 million barrels per day, as well as a network of more than 7,800 Chevron and Texaco service stations.
Thanks to a cash flow breakeven point the company estimates at roughly $51 a barrel (much lower than peers), Chevron is better positioned than most to cover expenses and its dividend even in the currently weak drilling environment.
Annual energy production exceeded 3 million barrels per day last year and the company added 494 million barrels to its proved reserves. Excluding asset sales, Chevron expects overall 2020 production to be flat and Permian Basin production to be 20% below prior guidance. Chevron also is committed to reducing run rate operating costs by more than $1 billion this year.
Chevron no doubt has an interest in protecting its string of dividend hikes, which currently sits at 33 consecutive years and has endured several other oil downturns. Dividend payments totaling just under $9 billion last year were easily covered by $12.5 billion of free cash flow.
Market value: $3.8 billion
DXC Technology (DXC, $15.07) provides information technology services in North America, Europe, Asia and Australia. The company, formerly known as Computer Sciences Corporation, changed its name following its 2017 merger with Hewlett Packard Enterprise's (HPE) Enterprise Services business.
Today DXC specializes in IT outsourcing, cloud capabilities with embedded security, software applications, analytics and advisory services. The company serves more than 6,000 customers across 70 countries, including more than 200 of the Fortune 500 companies. DXC generated revenues exceeding $20 billion last year and ranked No. 122 on the 2019 Fortune 500 list.
The company is relying on digital segment growth to offset declines in more traditional businesses and is using acquisitions to expand its digital footprint. Last year DXC produced 80% growth in its digital pipeline, 50% growth in digital bookings and 16% growth in digital revenues. EPS declined in the first nine months of fiscal 2020 due mainly to integration-related costs, but operating cash flow doubled to $2.06 billion.
DXC also generated $1.2 billion of adjusted free cash flow, which covered nine-month dividend payments more than six times over. Long-term growth in free cash flow has been impressive at 11% annually over the past decade.
DXC has modest debt that's three times free cash flow, and less than three times the company's current cash on hand, and its dividend is an ultra-low 16% of this year's estimated profits. The firm left its dividend intact in early March, when it announced a 21-cent-per-share quarterly payout in line with its previous payments. Nonetheless, a massive 49% decline has put DXC into a class of high-yield dividend stocks offering up more than 5% at current prices.
DXC Technology recently divested its State and Local Health and Human Services business and plans to use the $5 billion of sale proceeds to further reduce debt. Cowen analyst Jared Levin and Citi analyst Ashwin Shirvaikar both applauded the sale, which came at a higher price than expected. Both analysts maintain Buy-equivalent ratings on the stock despite acknowledging that COVID-19 could impact the business.
Market value: $1.0 billion
Dividend yield: 5.2%
HNI (HNI, $23.49) designs and builds office furniture and fireplace products for residential homes. The company sells office furniture under the HON, Allsteel, Maxon and other brands and distributes through independent dealers. HNI is a market leader in fireplace products, which are marketed under the Heatilator, Heat & Glo, Majestic and other brands and sold through distribution centers and showrooms across North America, Asia, Mexico and the Middle East.
Its sales are a mix of 76% office furniture and 24% hearth products.
HNI is among a number of high-yield dividend stocks whose businesses are sure to feel the effects of both the coronavirus and a recession. However, HNI is better positioned than most furniture-makers to weather a downturn due to a recent restructuring that cut expenses and bolstered margins. Despite lower sales, adjusted EPS grew 7% last year. The company's longer-term performance has been solid, with yearly EPS increases of 13% over five years and free cash flow growth of nearly 38%.
HNI has grown its dividend continuously since 1989, with the exception of 2008-09, when it held dividends steady. Dividend growth has averaged a modest 4% over the past five years. Its cash flow covered its payout by roughly three times last year.
The company has a terrific balance sheet showing long-term debt at 28% of capitalization and only 1.3 times free cash flow. It only has $53 million in cash on hand, but that could help float the dividend for a few quarters if the company were pressed.
Market value: $107.0 billion
Dividend yield: 5.4%
IT solutions provider International Business Machines (IBM, $120.12) greatly expanded its presence in the hybrid cloud market last year through the $34 billion acquisition of Red Hat. Thanks to Red Hat, the company now has the ability to offer open-source software to IT managers. This software is needed to modernize older applications to run in data centers and across different cloud services.
IBM was an early leader in the transition to the cloud but fell behind industry leaders Amazon.com (AMZN) and Microsoft (MSFT). Red Hat should help IBM close that gap. Cloud revenues are IBM's fastest growing business and currently represent over 25% of sales. Managers anticipate Red Hat could contribute more than two percentage points to IBM's annual sales growth over the next five years.
Management looks for free cash flow of $12.5 billion in 2020, which leaves plenty of room to cover $5.7 billion of dividend payments even if that forecast is cut due to coronavirus impact. In addition, IBM has nearly $12 billion in cash available to help pay the dividend in the short term if it came to that and management were willing.
IBM, while not a Dividend Aristocrat, does have an incentive to keep up its payout. Namely, at 24 years of dividend increases, it's one year away from membership in the elite payout club. Meanwhile, a 20% decline has driven IBM into this group of safe high-yield dividend stocks with a current yield of 5.4%.
Market value: $1.3 billion
Dividend yield: 6.3%
Nu Skin Enterprises (NUS, $23.91) develops and sells skin care and wellness products in approximately 50 countries worldwide. Its three main brands are Nu Skin (beauty and personal care products), Pharmanex (nutritional products) and ageLOC (anti-aging products).
NuSkin sells direct to approximately 1.16 million consumers worldwide via a network of more than 800,000 independent distributors. Roughly 87% of the company's sales are made outside the U.S. China is its largest market, accounting for approximately 30% of sales.
Nu Skin's near-term growth strategy focuses on completing the transition of its business to the cloud (with more than 80% of sales and 90% of global transactions already taking place online), launching an innovative new skincare device system in 2020 and fine-tuning sales compensation to better incentivize and retain sales agents.
Due to its strong footprint in China, Nu Skin was earlier than most in recognizing the impact of COVID-19 and has already baked coronavirus impact into its 2020 guidance. The company anticipates a 5% to 10% sales decline and a 29% drop in earnings per share.
Nonetheless, Nu Skin should have no trouble covering its dividend. In February, the company increased its dividend to 37.5 cents per share – its 19th consecutive improvement. That comes out to $1.50 per share in annual dividends, versus analysts' expectations for $2.01 per share, followed by a rebound to $2.49 in 2021. Moreover, the company has $345 million in cash, about $10 million more than its debt), that it can use to cover its payout in the short term if necessary.
Market value: $1.5 billion
Dividend yield: 6.7%
Last on this list of safe high-yield dividend stocks is Patterson Companies (PDCO, $15.52), a leading U.S. distributor of dental and animal health products. The company supplies consumables, equipment, software and services to approximately 100,000 dentists and dental offices across the U.S. and Canada.
Patterson entered the animal health market through its 2015 acquisition of Animal Health International and became the largest distributor of animal health products in North America, serving approximately 50,000 veterinary clinics and hospitals and livestock producers. Its sales are a mix of 57% animal health and 43% dental products.
The markets Patterson serves were chosen in part for their recession-resistant characteristics. Surveys indicate 95% of Americans value healthy teeth and more than 67% visit the dentist at least annually. In addition, 68% of U.S. households own a pet and 73% of pet-owning households visit the veterinarian at least annually.
During the first nine months of fiscal 2020, reported at the end of February, Patterson generated $128 million of free cash flow that easily covered $76 million of dividend payments. The company's EPS gains has been inconsistent, but annual growth in free cash flow has been reliable, averaging 16% over three years and 19% over five years.
Patterson has a decent though not unimpeachable dividend history. It has delivered cash distributions for a decade, though its last improvement was an 8% hike in 2017. That said, the company in mid-March felt confident enough to declare a quarterly dividend in line with its previous payouts.
Patterson withdrew its fiscal 2020 guidance in early April but said it was still on track to achieve its goals through the first two months of its fiscal fourth quarter ending in April.